Many people have heard of the term bond, but are not sure what bonds are or how they work.
Below, you can learn what is a bond.
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What Is a Bond
A bond is a type of investment in which you as a investor essentially loan your money to a borrower. The hope and expectation is that you will get your money back with interest after the term ends.
Bonds are a fixed income investment which means you will already know the return you will earn. Bonds are one of two ways you can invest in a business, the other is to invest in the companies stocks.
How Do Bonds Work
When you buy a bond you are essentially lending money to the issuer of the bond. Once you buy a bond you collect interest on it till it matures. You will also get the money back that you paid for the bond.
When you are shopping for a bond, you will be able to see each bond’s price, time to maturity, and coupon rate. The coupon rate is the annual money you will receive expressed as a percentage of the principal.
Risks of Buying Bonds
Bonds are subject to interest rate risk, this means that bonds risk changing interest rates potentially lowering the value of the bond.
Another risk bondholders face is that the company or the government defaults, this leaves bondholders to scavenge for the remaining assets. This is called credit risk and bonds that are judged as high risk are called junk bonds.
A third risk is that bonds are subject to inflation risk. If bonds pay a 5% risk, but the inflation is at 5.2% you are losing money.
How to Buy Bonds
There are a variety of types of bonds you can buy.
Firstly you can buy treasury bonds directly from the U.S. Treasury, bonds such as municipal or corporate bonds can be bought via brokerage.
You can also buy bond mutual funds, bond ETFs, and bond index funds. These types of bonds are traded on the market and have other tax benefits.
There are also mortgage bonds which are backed by real estate mortgages, while dependable investments can have a high risk to default based on the previous financial crisis.
Author’s Verdict
Using bonds can really increase your personal finances in generally very reliable way!
Hopefully the above information helps you better save.
Also be sure to check out our own lists of bank promotions and CD tables!
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